Aircraft Asset Management

Aircraft Asset Management: Tools & airline strategies during a world market downturn ATRS World Conference 2010 Paper Darcy Olmos Mancilla, Consultant AirBusiness Academy, 19 av. Leonard de Vinci, 31700 Toulouse, France Phone +33 562 121 139, fax +33 562 121 120 Email address: [email protected] Contents Abstract........................................................................................................................................................2 Introduction..................................................................................................................................................3 Background..................................................................................................................................................4 Airlines industry analysis.............................................................................................................................5 Airlines business models .........................................................................................................................5 Airlines world regions revenue and profitability analysis .......................................................................7 Airlines sample ............................................................................................................................................8 Aircraft asset management tools..................................................................................................................9 Airlines research sample: fleet ownership and analysis ............................................................................15 Brand new aircraft: financing and ownership analysis..............................................................................20 Conclusion .................................................................................................................................................21 Appendix A: Top 150 airlines group financial data ..................................................................................23 Appendix B: Airlines research sample’s revenues ....................................................................................24 Appendix C: Airlines research sample’s fleet data....................................................................................25 Appendix D: Lease vs. purchase comparison............................................................................................28 References..................................................................................................................................................29 Darcy Olmos Mancilla- ATRS World Conference 2010 1 Aircraft Asset Management: Tools & airline strategies during a world market downturn Abstract Have airlines changed the way they manage their aircraft during the current economic crisis? In this paper the author reviews aircraft asset management strategies and programmes implemented by airlines in today’s difficult business environment. It analyses the essential aspects of aircraft asset management tools available in the market, looking at the impact on the aviation industry. Through the analysis of fleet data of airlines from different regions and with different business models, the author has identified changes in the way airlines manage their fleets. Indeed, empirical data from latest aircraft transactions, financing and storage numbers evolution suggests a “change of approach” of industry players during this aviation market’s unprecedented crisis. On the other hand, trends in world aircraft ownership suggest an increase in airline fleet flexibility and diversification of the industrial, ownership and operational risks. Furthermore, aircraft values, economic and airline data analysis show a strong correlation between the aviation industry and the world economic situation. Aircraft asset management tools could be an important factor to be taken into account as part of the airline strategy and management decisions, notably during downturns. KEY WORDS Aircraft asset management, airlines business models, aircraft residual value, aircraft book value, aircraft ownership, airline fleet, operating lease, finance lease, sale and lease back (SLB), Export Credit Agency (ECA), securitization Darcy Olmos Mancilla- ATRS World Conference 2010 2 Aircraft Asset Management: Tools & airline strategies during a world market downturn Introduction Aviation is a highly cyclical/GDP correlated industry (Darcy Olmos, 2008), therefore economic downturns put real pressure on aviation industry’s profitability. The current economic crisis has had a non precedent impact on airlines’ net profitability of -$15.9 billions in 2008 and -$9.4 billions in 2009E (IATA, March 2010). On the other hand, the 1,400 or more aircraft due to be delivered this year, together with a normal 400 or so retirements, could boost the in-service fleet 4%, so adding more capacity to the already deteriorated aviation market. However, two thirds of airlines managers surveyed by IATA in April 2010 expect profitability to improve over the next 12 months; concern is building over the rise in fuel cost ahead which may hamper a speedy return to profitability at the industry level. This situation, along with a potential slow recovery on traffic demand, notably in mature markets such as Europe and North America, and increasing cost could create a real challenge to airlines and the way they manage their fleet. The aim of this paper is to review and analyse aircraft ownership and financing structures (referred to as asset management strategies hereafter) implemented by airlines with different business models and from different regions during the last 5 years and notably during today’s difficult business environment. To describe airline aircraft management and aviation industry trends, the majority of researchers use industry macro figures such as RPK, load factors and aircraft retirements figures with a strong focus on general aspects. This paper goes further by providing the essential characteristics of the most commonly used aircraft asset management tools and analysing specific airline fleet samples over the last 5 years to identify changes in the way airlines use these tools to respond to the economic crisis. Through the analysis of statistical data, the author has identified for new aircrafts an increase of ECA support, backstop and SLB transactions notably; and for second hand aircraft a decrease of operating leased aircraft coupled with an increase of aircraft grounding and retirements. On the other hand, no specific asset management pattern was identified among different types of airline business models. For instance, main airlines groups such as Lufthansa, Air France and Iberia despite the fact of being located in the same region; used totally different and sometimes “opposite” aircraft asset management philosophy although each of them have been key industry players for years. Darcy Olmos Mancilla- ATRS World Conference 2010 3 Aircraft Asset Management: Tools & airline strategies during a world market downturn Background One of the main risks to be managed when having aircraft on an assets portfolio is the residual or current market value (CMV). Indeed, when comparing the CMV average trend of a representative pool of aircraft and the world GDP behaviour (see figure 1). It is possible to see that aircraft prices mirror the GDP rate of growth trend with a large correlation coefficient of 0.53 (Darcy Olmos, 2009). Consequently, current economic crisis could have negative impact on airlines which decide to dispose of an aircraft under such a distress-crisis situation. Conversely, airlines have the possibility to mitigate this “asset residual value risk” by transferring it to a third party; which is willing to accept and benefit from it by way of keeping ownership of the asset while still giving airline the possibility to operate it under certain conditions and upon a rental payment through the so called operating lease contract. Hence, the risks such as operational, industrial and asset value one can be separately allocated to the airline, aircraft manufacturer and leasing company respectively. Figure 1: Aircraft Current Market Values (average) vs. GDP (YoY % Ch) (Source: Darcy Olmos ATRS World conference 2009) 6% 10% World GDP % Ch AVG CMV % Ch YoY 5% 5% 0% 4% -5% 3% -10% 2% GDP% Ch -15% CMV % Ch CMV 1% -20% 0% 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 -25% -1% -30% -2% -35% From figure 1 it is possible to see that second hand aircraft values are particularly exposed to economic cycles and market fluctuations. On the other hand, airlines analyse the ownership and financing structure they will use for each aircraft delivery months before it happens so as to minimise risk, cost, maximise cash and optimise the aircraft asset management during the asset useful life. Consequently, for new aircraft, economic and market conditions close to each aircraft delivery play an important role when choosing the best asset management tool among the different ownership and/or financing structures,. This can be explained, mainly because economic and market conditions could affect the availability of market liquidity, airlines profitability, cash position, aircraft market values and/or trigger regulation changes. Darcy Olmos Mancilla- ATRS World Conference 2010 4 Aircraft Asset Management: Tools & airline strategies during a world market

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